350 U.S.

492
76 S.Ct. 534
100 L.Ed. 634

WERNER MACHINE COMPANY, Inc., Appellant,

v.
DIRECTOR OF DIVISION OF TAXATION, DEPARTMENT
OF THE TREASURY, STATE OF NEW JERSEY.
No. 63.
Argued March 5, 6, 1956.
Decided March 26, 1956.

Mr. Charles Goodwin, Jr., New York City, for appellant.

Mr. Harold Kolovsky, Union City, N.J., for appellee.
PER CURIAM.

The State of New Jersey imposes on each domestic corporation 'an annual
franchise tax * * * for the privilege of having or exercising its corporate
franchise' in the State.1 This tax, as applied to appellant, is measured by the
corporation's 'net worth,' which is defined as the sum of the corporation's issued
and outstanding capital stock, paid-in or capital surplus, earned surplus and
undivided profits, other surplus accounts which will accrue to the shareholders
(not including depreciation reserves), and debts owed to shareholders owning
10 percent or more of the corporation's stock.2 Appellant is a corporation
organized under the laws of New Jersey, and is therefore subject to the tax. In
assessing appellant's tax for 1952, the Tax Commissioner included in
appellant's net worth the value of certain federal bonds held by appellant,
thereby increasing the amount due by $320.07. Appellant protested, claiming
that under R.S. 3701, 31 U.S.C. 742, 31 U.S.C.A. 742, these bonds were
immune from state taxation. The New Jersey courts upheld the Commissioner's
assessment, and this appeal contests the validity of the state statute as so
applied.

Appellant contends that this tax is not in reality a franchise tax, but is rather in
the nature of a direct property tax on the immune federal obligations. Corporate

franchises granted by a State create a relationship which may legitimately be

made the subject of taxation, Home Ins. Co. of New York v. State of New
York, 134 U.S. 594, 599600, 10 S.Ct. 593, 595, 33 L.Ed. 1025; Flint v. Stone
Tracy Co., 220 U.S. 107, 162, 31 S.Ct. 342, 353, 55 L.Ed. 389; Educational
Films Corp. of America v. Ward, 282 U.S. 379, 388, 51 S.Ct. 170, 171, 75
L.Ed. 400; and the statute expressly declares this to be a franchise tax.
Moreover, the Supreme Court of New Jersey has, on independent examination,
found this to be 'a bona fide franchise tax.'3 While this is, of course, not
conclusive here, Society for Savings in City of Cleveland, Ohio v. Bowers, 349
U.S. 143, 75 S.Ct. 607, 99 L.Ed. 950, we find no basis in this instance for not
accepting the state court's conclusion that this tax is not imposed directly on the
property held by the corporation. Cf. Pacific Co. v. Johnson, 285 U.S. 480, 495
496, 52 S.Ct. 424, 427, 428, 76 L.Ed. 893.
3

Appellant argues further that even if this is a franchise tax, it must fall because
its effect is the same as if it had been imposed directly on the tax-exempt
federal securities. Since the tax remains the same whatever the character of the
corporate assets may be, no claim can be sustained that this taxing statute
discriminates against the federal obligations. And since this is a tax on the
corporate franchise, it is valid despite the inclusion of federal bonds in the
determination of net worth. This Court has consistently upheld franchise taxes
measured by a yardstick which includes tax-exempt income or property, even
though a part of the economic impact of the tax may be said to bear indirectly
upon such income or property. See, e.g., Society for Savings v. Coite, 6 Wall.
594, 18 L.Ed. 897; Provident Institution for Savings v. Massachusetts, 6 Wall.
611, 18 L.Ed. 907; Hamilton Co. v. State of Massachusetts, 6 Wall. 632, 18
L.Ed. 904; Home Ins. Co. of New York v. State of New York, supra;
Educational Films Corp. of America v. Ward, supra; Pacific Co. v. Johnson,
supra. We have only recently adhered to this principle in another aspect of this
field of taxation. See Society for Savings in City of Cleveland, Ohio v. Bowers,
supra, 349 U.S. at pages 147 148, 75 S.Ct. at pages 609, 610; New Jersey
Realty Title Ins. Co. v. Division of Tax Appeals, 338 U.S. 665, 70 S.Ct. 413, 94
L.Ed. 439, on which appellant relies, is distinguishable, in that it did not
involve a franchise tax, but rather a tax whose legal incidence this Court found
to be upon the intangible assets of the corporation.

Since as applied here this is a permissible tax on the corporate franchise, the
decision below must be affirmed.

Affirmed.

N.J.Laws 1945, c. 162, N.J.S.A. 54: 10A1 et seq.

Id., 54:10A4(d)(5).

Werner Machine Co. v. Director of Division of Taxation, 17 N.J. 121, 125, 110
A.2d 89, 91.